To calculate inflation using the consumer price index, or CPI, subtract the CPI of the previous year from the CPI of the current year, divide the result by the CPI of the previous year, and then multiply the outcome by 100, explains the University of Colorado Boulder. For instance, the 2015 inflation rate can be computed by subtracting the 2014 CPI from the 2015 CPI, dividing the result by the 2014 CPI and multiplying the product by 100.
The inflation rate measures the pace of change in the overall price level of goods and services in an economy, reports the University of Colorado Boulder. Gauging inflation for the dizzying array of goods and services in an economy is difficult, so statisticians track the prices of a small sample of items and services, known as the market basket, that represent consumption in the broader economy.
Statisticians give items in this basket different weights depending on their relative importance. For instance, they give gasoline greater weight than carrots because most people spend a larger proportion of their budgets on fuel, notes the University of Colorado Boulder. Statisticians then use the prices of the individual items in the basket, along with their weights, to compute the CPI.
Apart from CPI, other measures used to track price increases include the wholesale price index, which measures changes in average wholesale prices, and the producer price index, or PPI, which tracks variations in the prices that producers charge wholesalers, explains the University of Colorado Boulder.